Despite dropping 1.4% in the third quarter, the fund’s outperformance continued. The Russell 2000 was down 6.9% in Canadian dollar terms, while the average U.S. Small / Mid Cap equity fund lost nearly 5%. The recent outperformance was the result of strong relative returns from a number of technology and consumer discretionary names, with Ingram Micro and Jardine Group helping the cause.
Manager Steve MacMillan, uses a bottom up approach, with sector exposure being the result of available opportunities. He continues to look for well-managed, high quality companies that have strong recurring revenue and a high return on equity. Of late, he has been finding these opportunities in the technology, consumer, and healthcare sectors.
During the recent market volatility, the manager used the selloff to put some cash to work by adding to some existing names, and adding a couple new ones at attractive prices. At the end of September, he held just shy of 4% in cash.
Looking ahead, the manager believes the U.S. will hold up well in the face of global economic uncertainty. He sees the stronger dollar keeping inflation in check, which will allow the U.S. Federal Reserve to hold interest rates low for the foreseeable future. Lower commodity, and specifically energy prices will also be a boost to consumer spending, which is a significant contributor to the U.S. economy.
The valuation metrics of the portfolio look attractive compared with its benchmark, offering a lower P/E ratio, higher returns on equity, and higher growth rates. In addition to the strong performance, its volatility has remained in line with the index, but has offered much better downside protection.
Still, with a one year gain of 28%, an annualized three year gain of 28%, and an annualized five year gain of 25%, it may be time to take some profits in the fund, rebalancing your portfolio, bringing its weight to a more neutral level, based on your objectives and risk tolerance.